Yen extends rally on hopes for BoJ move

Dollar hits two-month high vs. euro

By

WanfengZhou

NEW YORK (MarketWatch) -- The yen extended last week's gains Monday, surging to a fresh one-month high against the dollar and six-week high against the euro on growing speculation the Bank of Japan is poised to soon tighten its monetary policy.

Japanese Prime Minister Junichiro Koizumi said Monday he supports efforts by the BoJ to overhaul its quantitative monetary policy by slowing the flow of cash into its financial market.

He joins a growing chorus of Japanese government officials, including Finance Minister Sadakazu Tanigaki and Economic and Fiscal Policy Minister Kaoru Yosano, backing a near-term shift away from its curtailing quantitative easing policy.

"The latest change in rhetoric -- especially from the previously reluctant government officials -- increases speculation of a March policy shift," said Ashraf Laidi, chief currency analyst at MG Financial Group.

In late trade, the dollar was last changing hands at 116.23 yen, down 0.6% from 116.87 yen late Friday. The dollar had touched 115.64 yen earlier in the session, the lowest level since Jan. 27.

The yen also hit a six-week high against the euro. The euro last changed hands at 137.69 yen, down 0.8% from 138.74 yen late Friday, after having earlier dropped to 137.17, the lowest level since Jan. 12.

Up to BoJ

Overnight, Koizumi said "the government and the BoJ are now making a coordinated effort to terminate deflation."

"The final decision on which action Japan should take in line with such efforts is up to the central bank," he told reporters.

Tanigaki and Yosano both reiterated the BoJ should make its own judgment on whether and when to adjust its monetary policy.

Yosano further noted it would be acceptable for the BoJ to end its quantitative easing program, once it thinks the threat of further deflation is past.

Analysts widely expect the BoJ to end make such a move in April, but recent comments from Japanese officials have fueled speculation the BoJ may act as early as March.

The Yomiuri daily reported today that the government had decided to support a policy change at the Bank's next policy board meeting on March 8 and 9.

Steve Barrow, chief currency strategist at Bear Stearns, said he still believes a change in April is perhaps more likely than March, "but it's a close call."

Laidi said a key focus this week will be on Japanese consumer price index data, due Friday, which are expected to show the fourth consecutive monthly increase in inflation by as much as 0.4% on a year-over-year basis, adding to evidence that policy will change soon.

BoJ governor Toshihiko Fukui indicated on Feb. 23 that the central bank will shift policy "promptly" as soon as certain conditions are met -- one of these being consistent year-on-year positive CPI growth. Fukui said the consumer price index "should show a relatively clear uptrend" from January.

"The yen is expected to maintain its rally ahead of Friday's CPI release unless government officials intervene with some remarks about the unviability of moving prematurely," Laidi said in a note.

Some traders said the recent yen rally was more a result of an unwinding of yen-short positions and cautioned against being too bullish on the Japanese currency.

Many investors and speculators were heavily short on the yen as part of carry trades --in which traders borrow yen at lower rates and reinvest in higher-yielding currencies and fixed-income assets.

Analysts said the BoJ will be very cautious about raising interest rates, thus preserving the wide interest rate differentials between the dollar and the yen. The yen will continue to hold the role of funding currency for carry trades because of Japan's very low interest rates, they said.

Dollar at 2-month high vs. euro

The euro fell to a 2-month low of $1.1823, before paring losses to trade at $1.1845, down 0.3% from $1.1875 late Friday. The last time the price was this low was on Jan. 3.

"An important reason for the lackluster performance of the euro is down to the fact that despite strong economic data, rate expectations have hardly changed over the past month," said analysts from BNP Paribas.

The market is expecting the European Central Bank to raise interest rates by 25 basis points to 2.5 percent on Thursday.

Earlier, the dollar showed little reaction to a weaker-than-expected home sales report from the Commerce Department, which showed new homes sales in the United States fell 5% to a seasonally adjusted annual rate of 1.233 million in January, the lowest in a year.

Economists were expecting home sales to hold steady at about 1.27 million in January, according to a survey by MarketWatch, figuring that warm weather during the month would have put seasonally adjusted sales above their slowing trend. See full story.

Markets face a busy economic calendar on Tuesday, including the revised U.S. gross domestic product for the fourth-quarter and consumer confidence reports. See Economic Outlook.

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